Week in Review | 11 – 15 may 2020
Global equities endured a softer session as trade tensions between US and China escalated last week even as the world economy continues to grapple with the COVID-19 pandemic. The S&P500 index closed 2.3% lower as sentiment was dampened by increasing political rhetoric. In Asia, the MSCI Asia ex-Japan index was down 0.9%.
The Trump administration on Friday moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, in an action that could ramp up tensions with China. According to Reuters, the US Commerce Department said it was amending an export rule to strategically target Huawei’s acquisition of semiconductors that are the direct product of certain US software and technology. Under the rule change, in order for Huawei to continue to receive some chipsets or use some semiconductor designs tied to certain US software and technology, it would need to receive licenses from the Commerce Department.
China's commerce ministry said over the weekend that it is firmly opposed to the latest rules by the US against Huawei and will take all necessary measures to safeguard Chinese firms' rights and interests.
Tensions between the two countries reignited since US President Donald Trump blamed China for its handling of the coronavirus pandemic. Now trade disagreements have resurfaced with the Trump administration trying to convince allies to exclude Huawei gear from next-generation 5G networks on grounds its equipment could be used by China for spying. Huawei has repeatedly denied the claim.
In other news, Fed chair Jerome Powell highlighted at press conference last week that the US economy could see further downside risk given that the ongoing pandemic outbreak is likely to assert long-term impact on the productive capacity of the US economy. Powell stated that unemployment rate could peak around 20 or 25 percent, while noting that the likely outcome is not another Great Depression given the “fundamental differences” this time around. While a recovery is expected to be seen in 2H2020, a longer time frame is needed to allow the economy to gradually recover back to pre COVID-19 levels.
Nevertheless, Powell affirmed that the central bank will continue to stay accommodative and do whatever it takes to support the US economy. The Fed’s currently balance sheet has ballooned up to nearly US$7 trillion, and it continue to expand if the situation demands for it. Powell also mentioned that there is a need for more fiscal stimulus to be rolled-out by the government, but dismissed the idea of pushing interest rates to negative territory for now.
Meanwhile, China is set to convene its annual session of parliament this week where the key economic targets and plan would be set. Market expectations are that policymakers could unveil fresh stimulus measures to spur demand and prop-up growth through special bond issuances. The fiscal deficit cap is also expected to be raised by up to 3.5% as Beijing ramps-up stimulus through its own version of quantitative easing.
On portfolio positioning, we took some profit from our holdings in semiconductor companies such as Samsung, SK Hynix and Taiwan Semiconductor Manufacturing Company (“TSMC”) as the trade war escalated. A softer than expected order book size in the 2H2020 may also pose some downside risks to the industry. We also added Hong Kong Exchange (“HKEX”) into our portfolios as we see growing interest amongst Chinese companies listed in the US seeking a secondary listing in Hong Kong due to the growing rift between US and China. These include large tech companies such as online travel platform Ctrip and e-commerce player JD.com which could lift trading volumes in the exchange.
On the domestic front, the benchmark KLCI edged 1.5% higher last week as Malaysia released its first quarterly GDP print. Malaysia's economic growth slowed to 0.7% in the 1Q2020 which is its slowest pace of growth since 2009. Most sectors of the economy contracted except for private consumption which was likely supported by additional spending during the Chinese New Year festivities.
Moving into the 2Q2020, economic growth will likely come off even more sharply as the quarter captures the full impact of the movement control order (“MCO”) period where most businesses were temporarily shuttered. Against a challenging backdrop for the economy, the full year GDP growth forecast is expected to shrink between -5.0% and -0.7% in 2020.
Recently, we’ve seen a surge of retail participation in Bursa Malaysia as the temporary closures of casinos and gaming outlets draw punters into the stock market. Retail participation vaulted from 20.0% to 50.0% in the market at its peak. Last week, the average value traded in Bursa went up to RM5 billion last week, which is 2x of the average value traded last year. With retailers piling onto the local stock market, there is risk of over exuberance in certain counters.
On local politics, Parliament held its first sitting on Monday since the abrupt change in government that is now led by new Prime Minister Tan Sri Muhyiddin Yassin under the Perikatan Nasional (“PN”) coalition. However, it was a largely ceremonious event with the only agenda involving a speech by the King and no debate allowed. As such, the motion of no confidence against Muhyiddin will not be heard. The motion is unlikely to be head in the next Parliament sitting slated in July too, where the government is expected to prioritise other bills and policies related to COVID-19.
On portfolio positioning, we maintain our defensive stance of the local market and have raised cash over the months. We topped up some existing weight in glove names as favourable demand-supply dynamics in the sector led to higher average selling prices. We also increased exposure in Bursa Malaysia as strong trading volumes drive better margins. We also continue to tilt towards defensive names such as utilities and telco that will stay resilient.
The EM region snapped its 3-week outflow streak to gain a net US$460 million worth of inflow over the week as investors returned to the playing field. USD-denominated assets continue to be favoured over local EM assets amid better stability. In the week, hard currency bond funds in the region enjoyed an inflow of US$600 million while a US$145 million outflow was seen from local currency bond funds. On a year-to-date basis however, the region is still struggling from a US$33 billion outflow.
Zooming in on Asia specifically, the primary segment further added US$3.8 billion worth of new issuances in the week. This brings the total size of new issuances to approximately US$116 billion on a year-to-date basis; some 5.0% lower as compared to a year before.
We took the opportunity to participate in a new issuance by PT Indonesia Asahan Aluminum (“Inalum”) for some of our regional mandates. Inalum is an Indonesian state-owned company that specialises in aluminium smelting, who also owns significant shares in Indonesia’s mining companies including coal, metal, and other minerals. The new papers by Inalum garnered healthy traction in both the primary and secondary market, which saw the bonds advanced by 1.5 to 4.2 points across the curve.
On the secondary front, trading activities were vibrant early in the week though the momentum gradually tapered off as we entered mid-week. The IG space was mainly dominated by profit-taking flows for new issuances; whereas the Chinese HY property segment – especially the higher beta names – enjoyed a solid outing to close 0.5 to 5.0 points higher. Over the course of the week, credit spreads tightened by some 3bps and 11bps for the IG and HY space respectively.
As for the domestic bond market, government bonds closed mixed where the short-end closed firmer and the long-end saw better selling. Yield level for the 3-year and 5-year MGS edged lower by some 3-4 bps and the 10-year benchmark yield rose to close around the 2.90% level.
In terms of portfolio action, our focus at this juncture remains on govvies, GG and AAA rated bonds. Last week, we took the opportunity to participate in a 7-year debt issuance by Pengurusan Air SPV Bhd (“PASB”) at around 3.30% yield. Treading ahead, we expect to see a healthy pipeline of new issuances to rollout into the primary market; beginning with a funding conduit for the ECRL project that will likely be introduced this week.
Ultimately, our cautious stance remains in the interim and we will continue to keep a close watch on further market developments.
